China cuts growth target, but no signs of mega stimulus

  • China to target economic growth of 6-6.5% this year
  • National People’s Congress so far shows no signs of mega stimulus announcement
  • We continue to forecast a modest deceleration in GDP growth, accompanied by higher volatility in underlying activity

There were no signs of a mega stimulus to come out of China from the start of the annual National People’s Congress in Beijing. Growth expectations have been lowered, as anticipated, and targets for fiscal and credit support are modest at best. The fiscal deficit is barely rising, and policymakers are aiming for “basically stable” debt-to-GDP this year.

New growth and fiscal targets

A new growth target of 6 to 6.5% signals that policy levers will be used to keep growth above 6% this year. We remain happy with our recently revised forecast for 6.3% growth in 2019, though we suspect underlying activity may prove more volatile. From the other announced targets, it also seems that the government is, for now at least, behaving in line with our expectations for more fiscal support from the centre, rather than relying on local governments and credit growth.

More central fiscal support but stimulus comparatively modest

Local government bond quotas have been increased; by RMB 100 billion for general purpose bonds and RMB 800 billion for special purpose bonds, which finance infrastructure. On the face of it, this is a substantial increase in infrastructure financing. However, to an extent this reflects the reduction in shadow financing which had historically been a key part of the infrastructure story. To put things into perspective, the increase in local government bond issuance looks set to lift overall credit growth by just 0.4 percentage points this year.

Central government will be contributing RMB 2 trillion in tax cuts, including RMB 650 billion in VAT cuts. While the stated deficit target is only 0.2 percentage points above that seen in 2018, at 2.8%, the reality is likely to see a larger fiscal stimulus. The government employs a number of accounting tricks to keep the headline deficit below 3%, while in reality spending far more. All the same, the stimulus does not look to be on the scale of past rounds of easing.

Less commodity intensive stimulus

For now, announcements have been largely in line with our assumptions and so do not materially alter our forecast. We continue to expect a modest slowdown in growth, a smaller stimulus package than in previous slowdown phases and, perhaps crucially for the rest of the world, a stimulus package which is less commodity intensive than we are accustomed to seeing from China.